Banking Royal Commission: Commercial Property Wait and See

The commercial property industry remains relatively unscathed following the financial services royal commission final report although the spectre of ramifications down the track remains.

By the time High Court justice and royal commissioner Kenneth Hayne handed down the banking Royal Commission’s final report in early February the anticipated “huge impact” in terms of bank lending and therefore on commercial property had already occurred said AMP Capital’s chief economist Shane Oliver.

“It was feared there would be an impact in terms of a further tightening in bank lending standards,” Mr. Oliver said. “But if anything, the report put a final stamp on the tightening in bank lending standards that has already occurred.”

Over the year to March 2018, the Australian Prudential Regulatory Authority’s clampdown on lending coupled with fallout from High Court Justice Kenneth Hayne’s royal commission shrank banks’ commercial property exposure in Australia by $557 million, or 0.3 percent, to $176.9 billion.

Unlike the residential property area, however commercial property prices have remained relatively steady. Core Logic’s December 2018 figures found Australian house prices had over the same period experienced their sharpest drop since the global financial crisis, and forecast home values to continue trending lower.

Flow-on effects

The coast, however, is not completely clear. While pressure from APRA has come to bear mostly on home and personal borrowings the pressure on banks to tighten lending criteria generally continues to filter through.

Conditions of loans for small business, for instance, have been caught in APRA’s net, a factor “which could impact on commercial property,” Mr. Oliver said, before adding “but there is nothing additional in the report that suggests lending would get even tighter.”

“Business would argue it has already seen this tightening occur and that banks have done what was asked after the interim report (released in September) last year,” Mr. Oliver said.

“Basically, the Royal Commission has put a stamp onwhat has already taken place.”

In a few years’ time, however, the landscape could well be different if Justice Hayne’s recommendations for the mortgage broking industry are implemented by government. These recommendations are namely that borrowers, rather than lenders, pay a fee for mortgage broking services, and secondly that lenders be banned from paying trail commissions to mortgage brokers for new loans.

While managing director of SQM Research Louis Christopher concurs with Mr. Oliver on the fact nothing in the Royal Commission final report currently impacts directly on commercial lending, if these changes come to pass the goal posts could shift, he said.

“Mortgage brokers make up for about half of total lending and many of course operate in the commercial space as well as residential and could also be affected by this proposed change,” Mr. Christopher said.

“But it remains to be seen whether these recommendations are implemented at all - as there is a lot of noise out there from participants involved that this is all a bad idea.

“The government needs to come clean sooner, rather than later, on whether it will legislate to remove trailing commissions and introduce fees for borrowers. I cannot see many residential borrowers suddenly accepting that they will have to pay a fee for mortgage broking services.”

Retail is the main area of commercial impacted by recent restrictions on consumer lending and downward pressure on home prices. These factors among others have helped create challenging trading conditions for retail sales and in turn regional shopping centres, Mr. Oliver pointed out.

“Some funds have been under pressure to sell retail property and weak retail sales have occurred due to competition from online plus low wages growth and house price falls which makes people less likely to spend at the shops,” Mr. Oliver said.

“Furthermore, there’s been a perception among investors that retail property has gone too hard and too fast and those investors behind it have started to take their money away.”

Silver linings

Despite the retail outlook, the broad-brush view maintains that for now, fallout is limited.

“The appreciation in prices has slowed in office markets but they ’re still doing reasonably well partly because vacancy rates are low.

“Commercial property has been booming for a long time but it looks like it has started to slow only in the second half of last year particularly in retail. “

What’s more, the fallout effects have even led to a boon for the office market with a sudden increase in demand at a time of low vacancy rates: last week it was reported that the damning final report into the financial services sector – which resulted in 76 recommendations challenging key aspects of banking, superannuation, financial advice and rural lending – has created so much work for the banking, consulting and legal professions that the need for extra office space has jumped markedly.

The Sydney Morning Herald reported that the Commonwealth Bank of Australia is in the market for around 20,000 square metres of office space to quarantine its wealth management business - and furthermore, that other companies could follow suit it required to sell their financial services business.